Leases & Proposed Guidance On Contributions Received… · Leases & Proposed Guidance On Contributions Received/Made September 18, 2017 Jeff Holt, Partner, EisnerAmper LLP William

Leases & Proposed Guidance On Contributions Received/Made

September 18, 2017

Jeff Holt, Partner, EisnerAmper LLP William Epstein, Director, EisnerAmper LLP

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mailto:[email protected]

Speakers

Jeff Holt Partner EisnerAmper LLP [email protected]

William Epstein Director EisnerAmper LLP [email protected]



• Introduction

• Leases

• Clarifying the scope and accounting guidance for contributions received and made

• Q&A

Agenda

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New Leasing Standard

• After working for almost a decade, the FASB has finally issued its new standard on accounting for leases, ASU 2016-02 (“ASU 2016-02” or the “Standard”)

• The primary objective of the leases project was to address the off-balance-sheet financing concerns related to lessees’ operating leases

• The “Standard”

– Introduces a lessee “right-of-use” model where most leases will be on the balance sheet (similar to today’s capital leases)

– Eliminates the bright-line tests for determining lease classification

Leases: Overview

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• The “Standard” – May impact the presentation and expense recognition pattern

– Retains the fundamentals of today’s lessor accounting model (and as such, this presentation will focus on the impact on lessees)

– Applies to all leases greater than 12 months (with certain exclusions, intangible asset, inventory and others)

– Significantly increases lease footnote disclosures

– Is a wholesale change to lease accounting

– Is effective for calendar periods beginning on:

• Public Companies – January 1, 2019

• Private Companies – January 1, 2020

Leases: Overview

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Which best describes your role?

A. Finance staff at a for-profit organization

B. Finance staff at not-for-profit organization

C. Public accountant serving both sectors

D. Board member at a not-for-profit organization

E. Other

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Polling Question #1

Lease Definition & Identification

Per FASB’s master glossary, a lease is defined as:

“A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or

equipment (an identified asset) for a period of time in exchange for consideration.”

Lease Definition

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Identified Asset

Control over Use

Lease

Lease Identification

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Lessee Lease Classification, Recognition and Subsequent Measurement

Lessee Lease Classification

Look familiar?

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Lessees: Recognition

Lessor Lessee

Right to use underlying asset

Lease payments

ROU asset Right to use

underlying asset during lease

term

Lease liability Obligation to

make future lease payments

All leases (other than short-term leases) will be recognized on the balance sheet.

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• At the commencement date of the lease, the lessee would record a right-of-use asset and a lease payment liability measured at the present value of the lease payments (plus initial direct costs, prepaid lease payments, less any incentives received):

Right-of-use asset $20,000

Lease liability $20,000

• This treatment applies to both operating and financing leases. The subsequent measurement differs depending upon the lease classification.

Lessees: Recognition

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• Lease liability

– Previous carrying amount + interest expense – lease payments

Balance = Present value of remaining lease payments

• Right of use asset

– Previous carrying amount – current amortization expense

• Generally on a straight-line basis, over the shorter of the lease term or useful life of the right of use asset

Balance = Original amount – Accumulated amortization

Finance Leases: Subsequent Measurement

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Finance Leases: Subsequent Measurement

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$

Time

Interest expense

Amortization expense

Total expense

Interest expense $XX Lease liability $XX

Lease liability $XXX Cash $XXX

Amortization $XX Accum. Amort. $XX

Total expense = Interest + Amortization (not rent expense)

• Lease liability

– Previous carrying amount + interest expense – lease payments

Balance = Present value of remaining lease payments

• Right of use asset

– Recognize in income statement a SINGLE lease cost calculated so that the remaining cost of the lease is allocated over the remaining lease term (usually on a straight-line basis)

Operating Leases: Subsequent Measurement

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Lease liability $XXX Cash $XXX

Operating Leases: Subsequent Measurement

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$

Time

Interest

Amortization

Total expense

Rent expense $XX Lease liability (int.) $XX

Rent expense $XX Accum. Amort. $XX

Total expense = straight-line rent expense

• ASU 2016-02 brings most leases on the balance sheet as a “right-of-use” asset and a lease liability

• The increased leverage will potentially have a negative impact on key metrics or potentially cause debt covenant violations

• This may depend in part on how various debt agreements define and limit indebtedness

• Financing leases: expense recognition will be recorded as interest and amortization rather than as rent expense

– May result in lower income in early lease years (as interest expense is front loaded) more EBITDA (as it is all added back)

– Same as current capital leases

Leases: Debt Covenants

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• ASU requires entities to present operating lease liabilities outside of traditional debt, which may provide relief to some entities

• It is important for entities to determine the ASU’s potential effects on debt covenants and begin discussions with lenders early if they believe that violations are likely to occur as a result of adopting the ASU.

Leases: Debt Covenants

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The new lease standard applies to both operating leases and capital leases?

A. True

B. False

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Polling Question #2

Proposed Accounting Standards Update: Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made

Revenue Recognition of Grants and Contracts by Not-for-Profit Entities

Background:

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Project added to the FASB Technical Agenda to improve and clarify existing guidance

ASU 2014-09, Revenue from Contracts with Customers, including related disclosures, heightened the issue

Raised the question as to whether grants and contracts are in the scope of that

guidance (reciprocal vs. non-reciprocal)

Long-standing diversity in practice in classifying grants and contracts,

particularly from government entities


Areas of Confusion

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Issue 1: Reciprocal vs. Non-reciprocal Issue 2: Conditional vs. Unconditional

If funds are provided

with certain stipulations,

there is difficulty in

distinguishing whether a contribution

is conditional, restricted, or

both

Some equate the

government general public

– issue is whether

government receives direct commensurate value in return (because the

public benefits)

Many believe the

government doesn’t give

contributions

Stakeholders find it difficult to distinguish

between a conditional

and unconditional contribution >

causing diversity in application

Many NFPs treat federal

grants / contracts

with governmental

entities as exchanges

(regardless of substance)

Diversity in application of

“remote” notion –

whether the likelihood of

failing to meet a condition is

remote. (Some NFPs believe any condition within their control has

remote likelihood of

not being met)


Proposed guidance would assist entities in:

1. Evaluating whether transactions should be accounted for:

• Contributions within Topic 958 – non-reciprocal

• Exchange transactions subject to other guidance – reciprocal

2. Distinguishing between conditional and unconditional contributions

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Revenue Recognition Decision Process

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Is the transaction one in which each party

directly receives commensurate value?

Is the payment from a third-party payer on behalf of an existing

reciprocal transaction?

It is a non-reciprocal transaction. Apply contribution (non-exchange)

guidance.

It is an exchange transaction. Apply Topic 606 on revenue

from contracts with customers or other applicable topics

It is a balance-sheet only transaction. No effect on an entity’s revenue recognition

Are there conditions present (a barrier and right of return/right of

release must exist)?

Yes

Yes

No

No

It is unconditional. Recognize revenue in appropriate net asset

class

Are restrictions present (that is, limited

purpose or timing)?

It is conditional. Recognize revenue when

the condition is met

Yes

It is unconditional and with donor restrictions

It is unconditional and without donor

restrictions

Distinguishing contributions (non-reciprocal transfers of assets) from exchange transactions (reciprocal):

• Clarify how an entity determines whether a resource provider is participating in an exchange

– Evaluate whether the resource provider is receiving

commensurate value in return

• Based on: – Resource provider is not synonymous with the general public

• Indirect benefit received by the public as a result of transferred assets is not commensurate value received by the resource provider

– Execution of the resource provider’s mission is not commensurate value

– Is there expressed intent asserted by both the recipient and resource provider is to exchange resources that are of commensurate value?

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• Based on (continued):

– Resource provider has full discretion in determining the amount of transferred assets

– Penalties assessed on recipient for failure to comply with agreement are limited to the delivery of unspent assets

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Once the agreement with resource provider has been determined to be a contribution:

• Amendments require that an entity determine whether a contribution is conditional or unconditional

– Clarification on determining conditional contributions

• Donor imposed conditions must have:

– A barrier

– A right of return to the promisor for assets transferred or a right of release of the promisor from its obligation to transfer assets

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Indicators helpful in determining whether an agreement contains a barrier:

• Agreement includes a measurable performance-related barrier or other measurable barrier

• Stipulations that are related to the purpose of the agreement

• Limited discretion by the recipient

• Recipient required to undertake additional actions

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Example: Procurement Arrangement • NFP receives funding to perform a research study from local government

• Agreement requires NFP to:

– Plan the study

– Perform the research

– Summarize and submit the research to the local government

• Local government retains the rights to the research study

NFP concludes that the arrangement is a transaction in which commensurate value has been exchanged (reciprocal). • NFP is to perform a study for the local government and turn over the

findings to the local government

• Local government retains the rights the study

STOP! No need to go to next step.

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Example: Research Grant

• University is awarded grant from federal government to conduct research

• University must follow rules and regulations established by the Office of Management and Budget

• University must incur qualified expenses to be entitled to transfer of assets from federal government

– Any unspent funding during the grant period is forfeited and any drawn down funding that does not have related qualifying expenses must be returned

• University is required to submit summary research findings to federal government, but retains the rights to the findings

University concludes that the grant is not a transaction in which commensurate value has been exchanged (non-reciprocal).

• The federal government does not receive commensurate value

– Receives indirect benefit because the research findings serve the general public

• University and general public receive the primary benefit of any findings

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ISSUE #1: Reciprocal or Non-reciprocal?


Example: Research Grant

University concludes that the grant is conditional.

• Grant agreement limits University’s discretion on how the assets are to be spent (qualifying expenses)

• Right of return and release

• Following the rules of the OMB alone is not a barrier to entitlement of the assets because it is not related to the purpose of the agreement

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ISSUE #2: Conditional or Unconditional?


Example: Contribution from a Private Foundation • NFP receives a grant from a PF in the amount of $400,000 to provide

specific career training to disabled veterans

• Grant requires NFP to provide training to at least 8,000 disabled veterans during the next year, with specific minimum targets that must be met each quarter

• PF specifies that a right of release from the obligation in the agreement that it will only give NFP $100,000 each quarter if, and only if, NFP demonstrates services have been provided to 2,000 disabled veterans during the quarter

NFP concludes that the grant is conditional. • Right of release from obligation within the agreement

• PF requires NFP to achieve specific levels of service that would be considered a performance-related barrier

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Example: Contribution for a Research Grant

• NFP’s mission is working with gluten-related allergies

• NFP applies for and receives a $100,000 grant from a corporate foundation to perform research on gluten-related allergies over the next year

• Grant agreement includes the following: – Right of return

– General budget submitted with grant application must be followed or approval must be obtained for any significant deviations on spending

– Requirement that at the end of the grant period a report must be filed with the corporate foundation that explains how the assets were spent

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Example: Contribution for a Research Grant

NFP concludes that the grant is unconditional.

• General budget included in the grant proposal is not a barrier to entitlement because adherence to a general budget allows for broad discretion

• Reporting requirement alone is not barrier because it represents an administrative requirement and not related to the purpose of the agreement

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In order to be considered a conditional contribution there must be:

A. A barrier

B. A right of return to the promisor

C. A right of release of the promisor from its obligation

D. Both A and B

E. Both B and C

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Polling Question #3


Transition Approach

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A

B


Transition Approach – Modified Prospective Approach

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Effective Date

Completion

of Grant #1

Start of

Grant #3

Begin

recognizing

revenue using

new guidance

Start of

Grant #2

Completion

of Grant #2

No restatement of

revenue

recognized prior

to effective date

No restatement

of recognized

revenue

Recognize only

the previously

unrecognized

revenue, using

new guidance


Timeline of the Project

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Issued Proposed Update

November 1, 2017

Final ASU

August 3, 2017

Comment Period

Deadline

Q2 2018


• Although accounting for contributions is primarily an issue for not-for-profit entities, the amendments would apply to all entities (not-for-profit organizations and business entities) that receive or make contributions

• Applies to both contributions received by a recipient and contributions made by a resource provider

• Does not apply to transfers of assets from the government to business entities

• Presentation within the financial statements to label revenue (e.g. contribution, grant, donation) that is accounted for within the scope of subtopic 958-605 is not a factor for determining whether an agreement is within the scope of that guidance

• Resource provider entity type is not a factor

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Questions?

Thank You

Jeff Holt Partner EisnerAmper LLP [email protected]

William Epstein Director EisnerAmper LLP [email protected]



This publication is intended to provide general information to our clients and friends, It does not

constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the

subject matter.

Documents

Leases & Proposed Guidance On Contributions Received… · Leases & Proposed Guidance On Contributions Received/Made September 18, 2017 Jeff Holt, Partner, EisnerAmper LLP William